Amazon.com, Inc.’s (AMZN) Whole Foods Takeover Will Be a Springboard to Big Share Gains in Grocery Industry

Amazon's WFM Investment Part of Multi-Dimensional Grocery Strategy, Says Top Analyst


For Amazon.com, Inc. (NASDAQ:AMZN) there is currently no business like the food business, as the giant e-commerce platform closed a deal with Whole Foods Market (WFM) yesterday. The deal is part of Amazon’s effort to create a multi-channel grocery strategy to better cater to a wide range of consumers by recognizing that some prefer to shop in-store, via pickup points or by delivery.

Considering the potential for the new Amazon-WFM partnership to accelerate share gains in the $700 billion grocery industry, top analyst Colin Sebastian of Baird is updating his estimates for the remainder of 2017 and 2018. Furthermore, Sebastian notes the deal reflects “Amazon’s focus on driving merchandise volume rather than profit margins, including further benefits of Prime membership.”

Factoring in the Whole Foods deal, Sebastian is refiguring Amazon revenue for 2017 at $173.7 billion and consolidated segment operating income (CSOI) at $7.35 billion. However, Whole Foods gross margins is expected to fall just below what WFM had reported in 2016 at 33% vs. 34.4%, while Amazon operating margin will also fall off slightly at a 4.3% margin vs. 4.7% in 2016.

However, the analyst points out that the positive impact of the deal will extend “beyond the establishment of a grocery beachhead” thus providing “additional Value for Prime members.” By integrating Prime and WFM, Sebastian believes the ground is ripe to “facilitate share gains within the under-penetrated grocery category, but also serve as another Prime member acquisition tool (nonPrime shoppers represent ~45% of WFM shoppers per our proprietary survey).” This is similar, opines the analyst, to “Amazon’s significant investment in Prime Video content resulting in further velocity in retail transactions.”

Taking into consideration the “choppy shares”, the analyst is of the position that “as investors digest variable margins and the recent acquisition we continue to believe Amazon remains very well-positioned to drive significant ongoing growth in Retail, Technology, Media, Transportation/Logistics, and potential other massive market opportunities.”

As such, the analyst maintains an Outperform rating with a price target of $1,100 representing a near 16% rise over current trading levels.

Colin Sebastian has a solid TipRanks score with a 70% success rate and a high ranking of #11 out of 4,616 analysts. Sebastian yields 23.9% in his annual returns. When recommending AMZN, Sebastian garners 34.4% in average profits on the stock.

TipRanks analytics exhibit AMZN as a Strong Buy. Out of 32 analysts polled by TipRanks in the last 3 months, 30 bullish, while 2 are sidelined on Amazon stock at this time. With a return potential of 24%, the stock’s consensus target price stands at $1,173.74.